For a given decrease in demand, the effect on price is largest and the effect on quantity exchanged smallest when:
A)supply is perfectly elastic.
B)supply is elastic.
C)supply is unit elastic.
D)supply is perfectly inelastic.

Question

For a given decrease in demand, the effect on price is largest and the effect on quantity exchanged smallest when:
A)​supply is perfectly elastic.
B)​supply is elastic.
C)​supply is unit elastic.
D)​supply is perfectly inelastic.

Quizplus · Accepted Answer

When supply is perfectly inelastic, the quantity supplied remains unchanged regardless of changes in price. Therefore, a decrease in demand will have the largest effect on price as the market attempts to find a new equilibrium point where quantity demanded equals quantity supplied. However, the effect on quantity exchanged will be the smallest because the quantity supplied is fixed and does not change with changes in price.

For a Given Decrease in Demand, the Effect on Price